Anatomy of a De-merger

W hen the InterContinental Hotels Group split off from its parent company, that was just the start of the challenge for Jim Larson, IHG’s executive vice president of global human resources. He also worked on company rebranding, a global reorganization and a considerable downsizing. David Creelman, CEO of Creelman Research and an independent human capital analyst, conducted the interview with Larson.

Workforce Management: Can you set the scene by summarizing the recent history of the InterContinental Hotels Group?

Jim Larson: Less than three years ago, what is now the InterContinental Hotels Group was part of a huge international conglomerate called Six Continents. It consisted of a UK-based soft-drink business, a largely UK-based pub and restaurant business, and a global hotels business. The company made a fundamental decision to split itself up and operate IHG as a stand-alone hotels business.

With the decision to de-merge, we had to completely restructure the whole organization because the headquarters had been set up as a conglomerate that at one time ran six or seven different companies. Then we rebranded the hotel business from Six Continents to InterContinental Hotels Group. At that time, InterContinental represented less than 150 of the 3,500 hotels in the company.

While we were working on this, we were hit with a hostile take-over attempt. Over a 12-month period we had, in essence, the "perfect storm" of an organizational nightmare. We had a de-merger, a hostile take-over attempt, a rebranding of the company and a global reorganization with a reduction of nearly $100 million in costs and almost 40 percent of the people in the global and regional offices.

WM: What drove the de-merger decision?

JL: I interviewed with Six Continents on September 10, 2001, and they were planning to acquire another very large hotel chain, which would make us the largest hotel company in the world. But in 24 hours, after the events of September 11, the market changed completely. People and the markets were confused, and most deals dried up.

In our case, the pub and restaurant segment of the business confused investors if they were interested in the hotels; and the hotels business confused them if they were interested in the pubs and restaurants. They couldn’t get their heads around the whole package, and we were missing value for the shareholder. We were a UK-based organization trying to run a global business in hotels that was primarily driven by the U.S. market, yet because of the UK pubs and restaurant business, over half of our revenue was UK derived.

It was a unique situation, and we couldn’t seem to realize the true market value or leveragability of two outstanding businesses when they were combined, so the organization decided to split the business.

Investors have responded well to this de-merger. Our stock price has been as high as 80 percent above the initial stock offering, so there has been significant value realized for shareholders since the de-merger.

WM: As head of HR, what did you have to do once you decided to de-merge?

JL: Once we had made the decision to de-merge, we had to look at the entire talent pool at headquarters and split it between the two businesses. We had one treasury department and both businesses needed treasury; we had one tax department and both businesses needed tax--that’s what we had to work out. We had to take a look at the corporate headquarters and figure out how to create two corporate headquarters while we reduced costs at the same time. A great deal of work had to be eliminated, streamlined and simplified.

WM: How did you do that?

JL: First, HR assessed people across the organization. We went through the corporate, functional headquarters elements and assessed the people, asking ourselves and them some key questions. "What were their talents, unique skills and competencies?" Then we had to decide, "What were the new work requirements in the de-merged businesses?"

In the pub and restaurant spin-off, for example, they had no need for global tax competencies, but they did need extensive UK tax expertise. It was a matter of looking at the individuals in the organization, their competencies, capabilities, skill sets and experiences and, quite frankly, their desires. Some of these people were dyed-in-the-wool pubs people, and it didn’t matter what their skill sets were, or what the needs of the hotels business were, they weren’t coming to this new hotels organization.

We announced the de-merger in October [2002], to take effect in April [2003]. We then let the new leadership teams for each business get on with their work of clarifying their purpose, creating their vision for the future and building their strategy to get there.

WM: Did you do the assessment of the people?

JL: Initially we considered having an external organization come in and do an elaborate analysis of each person, but we opted not to do that. We felt we had a pretty good understanding of the people here, and so all we really wanted to do was get together and talk to each person.

Now, you have to remember we were doing this in conjunction with a 40 percent reduction in overhead. So while we were preparing for the de-merger, we were also redesigning the work, preparing everyone for the upcoming changes and producing massive volumes of work necessary to de-merge and keep the businesses running effectively.

WM: What about the emotional side? How did people react to this?

JL: While the de-merger was emotionally difficult, the real complexity lay in the reorganization. Redesigning the work and the workforce around the new strategy of the organization was going to be highly difficult and tremendously emotional for people. We brought in consultants Norm Smallwood and Joe Hanson from Results Based Leadership and 1 Point 0 and their teams to help us answer the questions, "What is our purpose in life?" "What should be the new strategy of this hotels business?" "Why and how are we going to be organized?"

Then we asked another consulting partner, Root Learning Map, to help us build alignment, understanding and commitment. How were we going to engage the hearts and minds of our people in the new organization? If I’ve learned anything in my career managing change with Pepsi, American Express, Pfizer and Kellogg’s, it’s to understand that the most important part about change is that you have to make sure people understand why you are doing what you are doing.

Then you have to fully explain what is going on and what it will mean to them personally. Not just the company, or their department, but them and their families. The decisions must be made as quickly as possible. You have to be clear with everyone and have straightforward conversations with everyone to let them know exactly what is going on. That was our commitment from the beginning.

We had a very high satisfaction rating through the process. At the end of the day, when someone walks out the front door and the media is asking them how they feel, I want them to say, "Well, I don’t feel that good about it, but I know why they did what they did, I feel I’ve been treated fairly and I knew what was going on the whole time."

The change message has to answer the questions "Why are we doing what we’re doing?" "What is actually happening?" and "What does it mean for me?"

WM: Tell me more about the reorganization of work.

JL: What Norm, Joe and their teams did was help the organization completely analyze all the work streams and conduct a top-line activity-value analysis. We really needed to understand what work was being done, how important it was and what it cost to do, relative to our new strategy.

We looked for what we called "advantage work," asking, "Does this work truly provide an advantage for us? Is it something competitors will wish they were doing better than us? Is it something a customer is willing to pay more for because it drives value to them?" Then we asked, "What work goes into making the ‘advantage work’ successful?" It’s what we called "strategic support" work. And then, "What is the work that doesn’t drive advantage in the marketplace but still has to get done?" We called that "business necessity" work. And finally, "What is the work that we just shouldn’t do any longer?"

It took us about six months. Initially, the executive team pulled in and dedicated a diverse mix of 12 of our best and brightest from around the world. They worked day and night for about six weeks to analyze our business requirements and current work streams and came up with suggestions on how we might redesign ourselves and focus our resources.

By December we had made the big decisions, and then we got the next level of management involved. This is another essential principle of change management--get the initial change sponsors in, then expand the vision to the next level in the leadership team and create a core set of proponents, advocates and agents of the change.

We then brought in the next 100 managers who were responsible for working through the micro-detail of the organization and restructure. These were the business-alignment teams, and we gave them the charter to drive costs down 40 percent, align with the new strategy, simplify work, eliminate work, minimize bureaucracy, empower people, get rid of the "nice to have" activities and make a structure that was efficient.

We asked that group of 100, in eight different teams, to tackle the business on a function-by-function basis with consulting support from [Smallwood and Hanson].

So the small groups started working in January. Between January and March they came up with their solutions on how we were going to look as an organization. All during this time we had massive communication going on, including lots of one-on-one engagement. Our commitment was that as soon as we knew what we would do, people would know.

WM: What’s next on your plate?

JL: We still have a massive culture change to implement. We need to drive home the concept of being one integrated company. To do so, we are implementing a global succession-planning and talent-management process, with globally aligned and integrated executive-compensation programs.

We want to build a new performance-management system and an evaluation process that focuses on leveraging strengths. A lot of recent research has led me, as a practitioner of this for almost 25 years, to completely change my thinking. Focusing on employees’ difficulties or problems does little to improve their performance or the performance of the organization. Instead, find their strengths and put them in roles where they are going to be strong.

One last thing we learned, from a leadership survey we conducted with the Corporate Leadership Council, was that we had a poor leadership-development process. There was plenty of training for general managers and staff, but very little dedicated to the senior management of major hotels, multisite-operations managers or other executive senior staff in the headquarters. So we have a focused program now on the top 140 leaders, to really train them and develop them around our new leadership brand. . . All of these things are critical to the biggest task for human resources: to build an enabling culture throughout the new IHG.